We’ve hit “peak oil”; now comes permanent price volatility

Oil production has remained stable since 2005, even as demand increased. The …

Since 2005, the global production of oil has remained relatively flat, peaking in 2008 and declining since, even as demand for petroleum has continued to increase. The result has been wild fluctuations in the price of oil as small changes in demand set off large shocks in the system.

In today's issue of Nature, two authors (the University of Washington's James Murray and Oxford's David King) argue that this sort of volatility will be all we can expect from here on out—and we're likely to face it with other fossil fuels, as well.

Limited supply

The notion of peak oil is a fairly simple one: oil is a finite resource and, at some point, we simply won't be able to extract as much as we had previously. There really is no getting around that limit for any finite resource. The issue that has made peak oil contentious, however, is the debate over when we might actually hit it. Murray and King are not the first to conclude that, even as the arguments were still going on, we had already passed oil's peak. Even though prices have gone up by about 15 percent per year since 2005, production has been largely flat.

The strongest argument against this being a real peak is the increasing volume of petroleum reserves reported by many countries. Even assuming those estimates were reliable (which the authors aren't entirely certain about), these reserves have clearly not enabled increased production. In the US, for example, production as a percentage of total reserves has dropped from nine percent to six percent over the last three decades.

"We are not running out of oil," the authors argue, "but we are running out of oil that can be produced easily and cheaply." This creates significant delays before any of the new reserves can be tapped, and it limits the amount of oil that can be economically extracted from them.

Non-conventional sources like oil sands have the potential to contribute to the global supply but, so far at least, they haven't managed to do so; current production estimates indicate that they won't any time soon.

The struggle to mobilize supplies has taken place against a backdrop of falling production and rising demand. Most established sources of oil are seeing declines in the area of five percent annually. Given that decline, it will be extremely difficult to meet demands projected for 2030—in fact, we'd have to add the equivalent of our total current production. In a fit of understatement, the authors deem this "very unlikely to happen."

Economic impacts

What are the consequences of being stuck at or near peak oil? The authors have produced a graph showing that, while supply is elastic enough to meet demand, prices stay stable. Once demand consistently exceeds supply, prices swing wildly. Murray and King term this a "phase transition" and suggest we'll be in the volatile phase from here on out.

That has some pretty significant consequences. Of the 11 recessions the US has experienced since World War II, 10 have been preceded by a sudden change in oil prices. The US isn't alone, either. Italy's entire trade deficit, which has contributed to its financial troubles, can be accounted for by the rise in imported oil. The world, it seems, has allowed its economies to become entirely dependent upon fossil fuels. "If oil production can't grow, the implication is that the economy can't grow either," the authors write. "This is such a frightening prospect that many have simply avoided considering it."

And it's not just oil that poses problems. US coal production peaked in 2002, and the global peak has been predicted to hit as soon as 2025. The last time global coal reserves were evaluated, in 2005, the total was cut by more than half compared to previous estimates. Fracking has boosted the production of natural gas dramatically, but even here the authors find some reasons for concern. Recent reports suggest that shale gas reserves have been overestimated, and many fields that have been in production for a while have experienced large declines in production.

The commentary concludes that we simply can't rely on any fossil fuel to provide a stable and economic source of energy for more than a couple of decades. And, given the economic shocks that result from rapid changes in energy prices, that's a serious problem. "Economists and politicians continually debate policies that will lead to a return to economic growth," the authors note. "But because they have failed to recognize that the high price of energy is a central problem, they haven't identified the necessary solution: weaning society off fossil fuel."

This weaning will require a large deployment of efficiency measures, nuclear power, and renewable energy sources. All of this will take time, which is why efforts need to be started now, the authors argue. (Not mentioned, but equally true, is the probability that taking these measures will smooth out the impact of reaching peak fossil fuel production.) Unfortunately, since most governments are unwilling to admit the prospect of indefinite economic stagnation due to our reliance on fossil fuels, they've been unable to generate the political will to even begin these efforts. Murray and King clearly hope their commentary will help get the ball rolling.

Exactly. Nutshell: We have lots of oil. We ran out of $2.50/gallon oil some time ago. We're trying to find more $3.00 a gallon oil, but what we're getting today is $3.50 per gallon oil. Soon, it will all be $4.00/gallon oil. Then $8.

Building a road in flat lands is cheap and easy, as is planting wheat in a level field where rain is plentiful and weather is fair. Building a road through Carolina swamps, through mountain ranges, etc, simply costs more. There's plenty of land yet to build roads on, little of it remains easy to do. Planting wheat on the side of a mountain is unheard of, as is doing so in a desert. Its costs more. A LOT more.

There's lots of oil, very little of it is in giant liquid stores and more and more requires not just complex (and environmentally risky) extraction, it's also further down and through types of earth more expensive to get through, and in most cases now that earth is more than a mile under water too. Further, more and more of it is not simply oil, pumping itself out of a pipe straight into a barrel, but oil mixed with mineral, sand, or other contaminants requiring significant filtering (and safe disposal) all adding to the cost.

It's not how MUCH oil we have, but what it costs to move it from where it sits and convert it into usable fuel. Not all oil is created equal. Some of it will costs tens of dollars a gallon to get (at todays costs), and that might be all we have left in less than 40 years.

Yeah, 'peak oil' is one of those journalistic conceits that always returns much reader gold. Between new patches of oil routinely being discovered around the world, and the pace of technology assisting us in using less oil per process, it is mostly a bullshit concept. Argue away!

It has become very difficult to stand up for the free market economy. It is under siege, as the true culprits of the crisis have in time-honored fashion blamed the crisis on the market. It has become difficult to defend capitalism as the meaning of the term has been conflated with a societal organization that is not truly capitalistic in the original sense of the term, but rather resembles a form of 'state capitalism' or 'soft fascism'. Most people due to their ignorance of economics believe that more government intervention is required to fix the crisis, in spite of the fact that it is government intervention that has brought it about. This is highly unfortunate, but it is not an obstacle that is impossible to overcome.

Good thing Obama rejected the Keystone Oil Pipeline proposal. It's not like that would have provided any stability for the economy while we continue to research other options.

What would that have done for us? The Oil from Keystone would simply go into the open market where speculators drive prices, not supply and demand.

Not entirely true. Price marketers use is determined by a large group of things - one of which is availability. Who knows if other factors would drive the price up or down with the pipeline, but Cushing (and Henry Hub, probably) would have really appreciated the pipeline.

Yeah, 'peak oil' is one of those journalistic conceits that always returns much reader gold. Between new patches of oil routinely being discovered around the world, and the pace of technology assisting us in using less oil per process, it is mostly a bullshit concept. Argue away!

Leaving out the politics of the matter, it is disingenuous to cite declining US production as evidence of peak oil. Production is declining on Alaska's north slope but there is lots of recoverable oil in ANWR that we arent' drilling for. New permitting in the Gulf is at a standstill since BP and he have historically held the East and West cost offshore areas off limits to drilling even though we know there is oil there.

Again, NOT arguing that we should or shouldn't drill in those areas, it's just that declining US production is a CHOICE and not a sign of peak oil.

Yeah, 'peak oil' is one of those journalistic conceits that always returns much reader gold. Between new patches of oil routinely being discovered around the world, and the pace of technology assisting us in using less oil per process, it is mostly a bullshit concept. Argue away!

This. "Peak Oil" has been a specter for so long that I expect some real hard data to be provided to show me it is real this time.

Ars, you should know there is a serious "boy who cried wolf" problem WRT peak oil, and you ought to take this time to either retract this article or put together a nice comprehensive explanation as to why it is true this time.

The fall in the price of natural gas has been one of the most striking economic phenomena of recent years. Of course, it remains to be seen what problems develop in extracting natural gas by fracking and burning natural gas does release carbon dioxide. But the prospects for releaving the energy supply bottleneck with domestic natural gas is still the brightest spot among our generally gloomy economic prospects. There is also the possiblity that Bill Gates might get his depleted Uranium reactor to work. Those expecting to clean up the environment through abstinence will be disappointed. I don't know how many of them are really prepared to abstain themselves. I have yet to know one conservationist personally who was willing to give up his or her automobile or airplane travel plans. But there does seem to be some reality to the possibility that the United States could both remove the energy bottleneck on any potential economic growth and the very large energy contribution to our very large trade deficit. Those developments would be very positive for the American economy.

Yeah, 'peak oil' is one of those journalistic conceits that always returns much reader gold. Between new patches of oil routinely being discovered around the world, and the pace of technology assisting us in using less oil per process, it is mostly a bullshit concept. Argue away!

Yes, peak oil has been a topic of journalism for a long time. I fail to see how that diminishes the argument. That's like saying, "People keep talking about racism. We've already talked about racism, it's over now."

The people arguing that we're declining because we're not tapping into our reserves seem to have missed this part of the article:

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Given that decline, it will be extremely difficult to meet demands projected for 2030—in fact, we'd have to add the equivalent of our total current production. In a fit of understatement, the authors deem this "very unlikely to happen."

Yes, there is still a lot of oil out there. No, it's not going to keep pace with demand well enough to give us stable prices. That's what peak oil means.

Ars, you should know there is a serious "boy who cried wolf" problem WRT peak oil, and you ought to take this time to either retract this article or put together a nice comprehensive explanation as to why it is true this time.

If you read beyond the headline, you'll see that the entire article is reporting on academic research. The article lays out the researchers' arguments for why we've hit peak oil, and then their arguments for why that implies price volatility in the future. Finally, the article says that to avoid economic shocks that go along with volatility, diversification of energy sources is required.

You're free to disagree with the arguments, but then it's incumbent upon you to post your reasoning and your evidence that contradicts the researchers' findings. Demanding that Ars "retract" a paper they didn't write and are clearly just reporting on is kind of silly, don't you think?

Yeah, 'peak oil' is one of those journalistic conceits that always returns much reader gold. Between new patches of oil routinely being discovered around the world, and the pace of technology assisting us in using less oil per process, it is mostly a bullshit concept. Argue away!

Yes, peak oil has been a topic of journalism for a long time. I fail to see how that diminishes the argument. That's like saying, "People keep talking about racism. We've already talked about racism, it's over now."

Until it's solved, it's worth talking about.

When we keep getting told that "this is the peak oil we are looking for!" and then we later surpass that peak, it makes for a serious problem in believability.

Our reserves of more difficult to get oil is huge, for centuries as the price remains high there will much efforts put into developing them. Tar sand oil is a resource we know how the use with a $30 a barrel cost to get and refine, with massive reseves in the world. As the frac'ing techniques improve, the harder to get at oil in non porous rock becomes easy to attain and again is massive in its reserves. We have reserves that are known and can be attained with current technology, that will last centuries. Frac'ing is only now being deployed on any scale, same with tar sands. To say the sky is falling is a pretty weak analysis. Oil will be with us a long time, the question of whether we should use it when faced with the consequences of its use is another debate.

The case for Peak Oil is pretty compelling. The fact that world oil production is flat at a time of record oil prices is telling as is the fact that new discoveries each year have come nowhere close to world production each year in over 20 years. The cheap oil is running out. We need to begin the shift to alternatives as soon as possible and invest in improved technology for alternatives (increased efficiency for wind/solar, nuclear power) - with natural gas as a possible exception, the price of most fossil fuels is going to remain high, if not go higher going forward. Here's an article about Peak Oil that is well worth reading.

Ars, you should know there is a serious "boy who cried wolf" problem WRT peak oil, and you ought to take this time to either retract this article or put together a nice comprehensive explanation as to why it is true this time.

If you read beyond the headline, you'll see that the entire article is reporting on academic research. The article lays out the researchers' arguments for why we've hit peak oil, and then their arguments for why that implies price volatility in the future. Finally, the article says that to avoid economic shocks that go along with volatility, diversification of energy sources is required.

You're free to disagree with the arguments, but then it's incumbent upon you to post your reasoning and your evidence that contradicts the researchers' findings. Demanding that Ars "retract" a paper they didn't write and are clearly just reporting on is kind of silly, don't you think?

Look at my quote, I said article, not paper. The article is poorly written when they can't address the basic problems of peak oil and just run with whatever the paper told them.

People tend to believe what they want to believe. Peak oil is a known issue that must be addressed at some point, and I don't see how waiting around in denial will help solve this problem. Typically, the best solutions are the well thought-out ones, not the ones put in place at the last minute due to absolute necessity.

Yes, this volatility is the symptom of a stable supply in the face of rising demand. You see the same flapping effect with traffic jams, and the gold standard. It's basic queuing theory, if I recall it correctly. As _fixed_ demand -- demand that won't be deterred -- gets closer to the supply, the wait time gets closer to infinite. It gets very bad well before that.. Math describes the real world here, too,

I'm surprised there are so many skeptical of the peak oil concept. It's clearly coming. "Drill, baby, drill" only accelerates the problem by delaying a shortage that will eventually happen. High fossil fuel costs are sadly what it is going to take to drive innovation.

It is a finite resource and it has/is/will peak. This cannot be argued against. If you believe that the production rate of oil will climb for the rest of history, then you are a fool.

The trouble with pinning down a date for the peak is that the available data is patchy. The world's largest producers do not allow 3rd party audits of their fields and infrastructure. The OPEC quota system rewards over-statement of reserves.

The data we do have is still rather persuasive. In order to maintain current rates, we have to discover as much oil as we pump. In 1965, we discovered 55 billion barrels of oil. Since then, the rate of discovery has been dropping. Every country in the world except for a handful of Middle Eastern countries are in decline. Despite record prices and growing global demand, supply refuses to grow. A definite answer is impossible until many years after the fact, but right now, all signs point to peak.

If we are not currently at the peak, then there is a large blind spot in the data. There is an entire Saudi Arabia's worth of oil, hiding somewhere that we haven't looked. And that undiscovered oil is easy to drill for, cheap to pump, and lightweight enough to easily turn into gasoline. And then ten years later, we must find another one. And we must find more on top, to offset the already ongoing declines everywhere else.

The answer is not clear, but I am personally persuaded by the data we have, that we are at, or near, the all time peak production of oil. 20 years from now, we will be pumping less from the ground every day, than we are now. I'd put large amounts of money on it.

Good thing Obama rejected the Keystone Oil Pipeline proposal. It's not like that would have provided any stability for the economy while we continue to research other options.

I agree. People in the area can stop worrying about the poisoning of their drinking water.

You do realize that Warren Buffett's train company (Burlington Northern) is gearing up to start moving the oil south by train. That the many, many trains will pollute a lot more than the pipeline ever will and that the cost to buyers will be far higher.

Yeah, 'peak oil' is one of those journalistic conceits that always returns much reader gold. Between new patches of oil routinely being discovered around the world, and the pace of technology assisting us in using less oil per process, it is mostly a bullshit concept. Argue away!

New discovery and better recovery happens all the time, but the point is that discovery is slowing down and recovery is getting more expensive in terms of both capital costs and collateral damage (see deep ocean drilling, fracking, tar sands). The result is that the people who want energy are really going to have to pay for it. No more cheap rides. Things get even more interesting if oil exporters decide they need to hold onto their production to meet their own strategic needs.

Yes, peak oil has been a topic of journalism for a long time. I fail to see how that diminishes the argument. That's like saying, "People keep talking about racism. We've already talked about racism, it's over now."

Until it's solved, it's worth talking about.

I gave a couple of reasons how come it is a bullshit concept: more oil can be, and is routinely discovered, and science/technology keeps finding ways to either use less oil in any given industrial process, or else use something else besides oil, or its byproducts.

For example, you can run your car's motor entirely on synthetic motor oil. It is more expensive, but it works either as well, or better, depending on who you believe.

'Peak oil' is a sky-is-falling approach to the geo-political problem that is oil.

Ars, you should know there is a serious "boy who cried wolf" problem WRT peak oil, and you ought to take this time to either retract this article or put together a nice comprehensive explanation as to why it is true this time.

If you read beyond the headline, you'll see that the entire article is reporting on academic research. The article lays out the researchers' arguments for why we've hit peak oil, and then their arguments for why that implies price volatility in the future. Finally, the article says that to avoid economic shocks that go along with volatility, diversification of energy sources is required.

You're free to disagree with the arguments, but then it's incumbent upon you to post your reasoning and your evidence that contradicts the researchers' findings. Demanding that Ars "retract" a paper they didn't write and are clearly just reporting on is kind of silly, don't you think?

Look at my quote, I said article, not paper. The article is poorly written when they can't address the basic problems of peak oil and just run with whatever the paper told them.

The paper draws this conclusion WRT peak oil which the article mentions

"Murray and King are not the first to conclude that, even as the arguments were still going on, we had already passed oil's peak. Even though prices have gone up by about 15 percent per year since 2005, production has been largely flat."

A reasonable assumption here, is that since the production of oil has not steadily increased in relation to the demand of oil, it must be getting harder and harder to extract at lower price points. And thus it is likely for peak oil to already be here.

I gave a couple of reasons how come it is a bullshit concept: more oil can be, and is routinely discovered, and science/technology keeps finding ways to either use less oil in any given industrial process, or else use something else besides oil, or its byproducts.

For example, you can run your car's motor entirely on synthetic motor oil. It is more expensive, but it works either as well, or better, depending on who you believe.

'Peak oil' is a sky-is-falling approach to the geo-political problem that is oil.

As others have said: Less oil is discovered than is used.

Synthetic oil is a pretty tiny drop in the bucket. You change your oil every 5,000 miles or so. You put in 4 quarts. In that time you burn over 200 gallons of gasoline. So synthetic oil saves you less than 1% of the oil needed to drive the car.

At the same time China and India are industrializing. If we wanted cheap oil and life the way we have it we'd need 5-10 times as much production as we had 10 years ago.

Even without a supply peak anytime soon I don't foresee oil production growing fast enough to meet demand. On top of that we have reason to expect a supply peak.

Yes, peak oil has been a topic of journalism for a long time. I fail to see how that diminishes the argument. That's like saying, "People keep talking about racism. We've already talked about racism, it's over now."

Until it's solved, it's worth talking about.

I gave a couple of reasons how come it is a bullshit concept: more oil can be, and is routinely discovered, and science/technology keeps finding ways to either use less oil in any given industrial process, or else use something else besides oil, or its byproducts.

Using something else besides oil is a solution to the peak oil problem..... Also, how can you be sure that newly discovered oil makes more than half of the worlds total oil reserves prior to the industrial revolution? And even if that's true, we know FOR SURE that most newer oil reserves are more expensive to extract from, thus creating problems as well.

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For example, you can run your car's motor entirely on synthetic motor oil. It is more expensive, but it works either as well, or better, depending on who you believe.

Synthetic oil is not the same as natural oil. It's creation and use require different processes. Your point here seems to be contradictory because you are talking about alternatives to oil use, not the continuation of oil use which you support.

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'Peak oil' is a sky-is-falling approach to the geo-political problem that is oil.

You may choose to frame the problem however you want, but that doesn't mean its no longer a problem.

I first read about peak oil about a decade ago....it freaked me the hell out. Basically, most of the world human population could not and would not exist if not for the cheap and plentiful petroleum based fertilizers used for a vast majority of the world's food production.

Take away the oil...and you take away the people's means to survive. It's not just about keeping the lights on and your car gassed up...it's about feeding 8 billion people (and growing).

The biggest problem here is the economic unsustainable nature of, not just of the "first world" lifestyle, but the prospect of being able to feed the world's population.